Europe’s financial crisis threatens U.S. recovery

WASHINGTON — — The financial crisis in Europe is threatening to put a damper on the economic recovery in the U.S. and abroad just as the American economy is gathering steam.

A credit contagion that began in heavily indebted Greece spread Wednesday to Spain, whose economy is much larger than Greece's, as Standard & Poor's cut the Madrid government's credit rating. Earlier in the week, S&P slashed Athens' bonds to junk status and downgraded Portugal's debt as well.

On Thursday, European stocks rose after two days of heavy selling, as officials assured markets they were working quickly to approve a bailout for Greece in an effort to keep the country's crisis from dragging others into a continentwide financial meltdown. Major Greek stock indexes rose 6 percent or more, and yields on Greek, Portuguese and Spanish government bonds fell sharply.

But in statement late Thursday, Moody's warned that a "multinotch downgrade" of Greek debt remains likely.

In the U.S., the Dow Jones industrial average, also bolstered by corporate earnings and positive economic reports, advanced 122.05 points, to 11,167.32.

But even under the rosiest scenario in which a rescue package comes through and the problem is contained, analysts say, European economic growth will slow as more countries feel pressure to raise taxes and take other measures to get their fiscal affairs in order.

"It'll take years of savage spending cuts, wage cuts and welfare-pension reform to eventually grow out of the debt situation," said Ruth Stroppiana, an economist in London for Moody's Economy.com.

That's not good news for U.S. businesses, which count on Europe as a major market for an array of goods but already have felt the winds of an economic slowdown.

In the first two months of this year, U.S. companies exported $36.5 billion of products to European Union nations, almost no change from the same period last year, even though American exports overall were up 17 percent in the same period.

On the plus side, U.S. banks hold relatively little debt issued by Greece and other at-risk European countries.

But that isn't keeping some analysts from exploring a worst-case scenario.

Economist Nouriel Roubini, known as Dr. Doom for a perennial pessimism that helped him predict the worldwide financial crisis, said Greece's financial problems could batter global credit markets, disrupt the world's economic recovery and potentially tear apart the 11-year-old European monetary union.

Meanwhile, the crisis is being felt by U.S. businesses.

Earlier on, with public protests against austerity plans escalating, the Greek government placed a $250,000 order for the body shields that Paulson Manufacturing Corp. makes for riot police and others. Now, the order has been placed on hold.

"Their money problems in Greece are dramatically affecting us," said company President Roy Paulson.

It isn't just shipments to Greece that some economists are concerned about. The spreading financial problems have sown fears about the stability of the European banking system and cast a deepening gloom over the continent's economy.

In recent weeks, improving indicators in the U.S. had prompted some economists to raise projections of the country's first-quarter economic growth, due to be reported Friday, to an annual rate of more than 3 percent. The government's report is expected to credit an increase in exports as a major contributor to the economy's growth.

That sort of momentum is what Michael Kelly, chief executive of Allied Photochemical Inc., is counting on.

Allied has seen a surge of exports as the global economy has rebounded. More than 40 percent of the company's revenue comes from sales of chemicals to foreign markets, with more than half of those going to Europe.

So far, Kelly said, Allied has felt little from the gathering financial crisis.

"But if it gets much worse," he said, "it'll cause a pullback here."

Tribune Newspapers reporter Tom Petruno and The Associated Press contributed to this report.